Debt Elimination Options

There are various methods utilized by consumers to resolve runaway credit card debt, medical bills and debts, personal loans, and other unsecured debts that have gotten out of control. This page lists the most common debt solutions, along with potential pros and cons.

Debt Consolidation – Among the different options of debt solutions, debt consolidation, in most cases is the first and most fiscally responsible option. This method combines multiple debts into a single, new loan with a single payment. Some debt consolidation plans are based on securing an unsecured loan at a lower interest rate than you would pay on your credit cards. Other debt consolidation plans may entail securing a loan against some collateral, asset, such as your home. Consolidating debt can offer several advantages, such as a single monthly payment and a potential reduction in the amount of interest that must be paid. However, it usually does not reduce the principal debt and often extends the period of time for debt repayment. Depending on the particular arrangements, debt consolidation can also potentially affect a person's ability to discharge debts in a future bankruptcy filing.

Learn More:
Guide to Debt Consolidation
Federal Direct Consolidation Loans

Debt Settlement - This is a legal and structured solution to runaway debt that negotiates down the amount of debt you must pay. Sometimes also referred to as debt negotiation, in this approach, professional firms work with your creditors to settle the amount you must pay, often by as much as 50% of the total debt. In the case of individuals on the brink of financial ruin, most creditors would rather negotiate with a trustworthy professional intermediary for some payment rather than possibly winding up with no payment at all. In addition to negotiating down the debt you must pay, debt settlement can also significantly shorten the time before your unsecured debt is paid.

Debt settlement may not be right for everybody or for all types of debt, and it is not available in all states. Results may vary based on a participant's ability to save funds and the creditors' willingness to negotiate. The program does not assume any debt or provide credit score assistance, and there is no guarantee against lawsuits by creditors or adverse impact on credit scores.

Debt settlement options can be very confusing for a consumer looking for help. In and of itself, choosing which settlement company to join can be difficult. The different payment schedules, fee structures, customer service methods, savings practices, past history of success, industry organization memberships, and accreditations should all be taken into consideration. When analyzing your debt settlement options, be wary of any monthly payment that seems “too good to be true”. Working out a debt settlement payment schedule is a complex process. When a debt consultant provides you with the monthly payment of your dreams without an in-depth analysis of your situation, do some more looking around prior to committing yourself. Trying to settle debt is not an easy or comfortable process, so once again, proceed with caution with anyone who paints a different picture. Debt settlement is difficult, time consuming, and stressful, but then again so is being in debt!

Learn More:
The Debt Settlement Process
Benefits of Debt Settlement
United States Organization of Bankruptcy Alternatives Frequently Asked Questions

Debt Negotiation – A process for negotiating with creditors to reduce the amount of Debt owed. See "Debt Settlement."

Credit Counseling – Consumer Credit Counseling Services (CCCS) work for the creditors, not for you. These firms were originally established by credit card companies to collect as much of the debt as possible from troubled consumers. Generally, the credit counseling process involves a service firm negotiating with the credit card companies to reduce the interest you are being charged. Consumer Credit Counseling assists its clients by reducing their interest rates which helps in paying of their debts faster. . However, you will be paying back the total balance, with interest on top of the balance. A significant drop in your credit score is also a likely side affect of entering a CCCS program.

Learn more:
From the Federal Trade Commission: Before You File for Personal Bankruptcy: Information about Credit Counseling and Debtor Education
The National Foundation for Credit Counseling

Continuing on with the status quo – If you've fallen behind on credit cards and personal debt, you can be running on a treadmill with no end in sight, as you juggle payments to try to put out one financial fire after another. Many will seek budgeting advice which is an obvious and essential place to start. A new budget may enable you to make minimum payments, much of your money could be eaten up in interest and it can be years – even decades - before a debt is fully paid.

Bankruptcy – This is a legal process in which a person seeks the protection of the courts if they cannot pay their debts, a last resort alternative to serious debt. While bankruptcy offers several advantages for those in serious financial distress, many people have misperceptions about what bankruptcy will and won't do for them. Many people think that bankruptcy will wipe the slate clean, but recent changes in the bankruptcy law impose some limits on bankruptcy options for individuals. To file a Chapter 7 Bankruptcy, one that discharges all debt, an individual must qualify through a "means test," must participate in credit counseling, and must liquidate all non-exempt assets. The other form of individual bankruptcy is Chapter 13, in which an individual who has earning capacity retains control over all assets, but must have a structured plan to devote a portion of earned income to pay creditors. Typically, such plans run for three to five years. With this option, you have the stigma of bankruptcy, but you must still repay a portion of your debt. Whether Chapter 7 or Chapter 13, bankruptcy is a public process and can stay on your credit record for up to 10 years.

Learn more:
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) Chapter 7 Basics from the U.S. Courts
Chapter 13 Basics from the U.S. Courts

* Individual results for each program may vary based on ability to save funds and creditors willingness to negotiate. Program does not assume any Debt or provide credit score assistance. Program not available in all states, so please review all terms and conditions of program prior to enrollment.